My social psychology professor played this game in class once, to demonstrate something-or-other, almost certainly linked to her concept of mindfulness, which is all she ever talked about.

She auctioned off a $10 bill, and, no kidding, bidding reached $24 or so before she shut it down. And she did, actually, complete the transaction. The "loser" was pretty upset, and may have gotten his money back after class, for all I know. Still, it was a great show, and a good time was had by all. You have to wonder, though, whether people continued to bid to cut their losses, or out of pride. People are funny like that...

I wouldn't be surprised, actually, if she kept the students' money. She was a complete lunatic as far as professors go, but apparently rather shrewd. Just don't play this game in a bar, though, because it's very likely to get you beat up.

Though it may be irrational to pay more than one dollar for a dollar, at any stage of the bidding, the second highest bidder can rationally improves his or her position by incrementally outbidding the first highest bidder.

This is because you will only make a few dollars before people realise they're only digging a bigger hole for themselves and stop bidding. You could run a lot of dollar auctions but as word gets round people will stop taking part.

The one thing you must never do is auction off a large some of money in this way. The reason is that sooner or later people will start to work together. You could probably get away with five or maybe even ten dollars but GO NO HIGHER! Say you were to say hold a "fifty dollar auction" then something like this might happen:

You: "Ok everyone this is a "Fifty Dollar Auction" you know the drill: the two highest bidders pay and the highest bidder gets the money! So any offers for fifty dollars!"

Fool 1 (to other fools): "Hang on a second I've got an idea. I'll bid ten bucks and then none of you guys bid and I'll win the fifty. Then I'll keep ten bucks to cover my losses and we'll split the rest of the money, that we all make an easy two bucks."